Who are Embezzlers?

Occupational fraud is very likely the most costly and most common form of financial crime in the world and has increased to 50%. Experience has shown that embezzlers are opportunists who find weaknesses in systems and exploit them. The Association of Certified Fraud Examiners issued their Occupational Fraud 2022: Report to the Nation. The study shows that Owners and Executives committed the most significant percentage of occupational fraud, $337,000, and employees $50,000. 

The study also indicates that as tenure in an organization increased, the likelihood of a larger dollar amount embezzled increased significantly, and there is a tendency for collaboration with others to occur. Occupational fraud by departments showed that the most significant risk of loss was in Executive/upper management, followed by operations, accounting, and then sales.

73% of the fraudsters were male and caused larger losses than females. Median losses caused by men ($125,000) were only 25% higher than median losses caused by women ($100,000). 

The age distribution of fraud perpetrators in our study resembles a bell curve, with the majority of frauds (54%) having been committed by people between the ages of 31 and 45. Median losses, on the other hand, tended to directly correlate with age. Only 3% of fraudsters were over the age of 60, but the median loss in this group was $800,000, which far surpassed any other age category. Again, the educational level tends to increase the risk of loss, with a college degree being the largest category. 

Once an organization has identified fraud and determined who was responsible, it must decide whether to punish the perpetrator(s) and how. Termination was by far the most common punishment faced by perpetrators (61% of cases). In 11% of cases, the perpetrator was permitted or required to resign in lieu of termination, and in 12% of cases, the perpetrator had already left the victim organization before the fraud was discovered. Not all fraud cases end up in civil or criminal courts. Moreover, not all cases that do involve litigation lead to negative consequences for fraudsters. To better understand organizations’ rationales for not pursuing criminal charges against fraudsters, we asked respondents whose organizations did not refer their cases to law enforcement why they chose not to. Internal discipline being deemed sufficient was the most commonly cited reason (50%), with fear of bad publicity ranking second (30%), and private settlements third (28%). In the median loss of $200,000, 58% resulted in criminal referrals. Of them, 44% pleaded guilty/no contest, 22% were convicted at trial, 17% declined prosecution, and 10% were acquitted.

The study showed that 82% of Anti-fraud controls were modified following the fraud, which lowered fraud losses.  

With this general information, it is imperative that business owners pay attention to who they are hiring and what is happening in their lives as they work for the company. The following are the main red flags that should be observed:

1. Living above their means,
2. Financial difficulties,
3. Unusually close association with vendors or customers,
4. Control Issues, unwillingness to share duties,
5. Irritability, suspiciousness, or defensiveness
6. Bullying or Intimidation,
7. Divorce or family problems,
8. Wheeler-dealer attitude,

Investigations conducted in the past revealed the following:

1. A female controller in a financial institution compromised the Chief Financial Officer (CFO) with sex, allowing her to avoid internal controls and embezzle $600,000 via the use of multiple corporate credit cards. She was living above her means by driving vehicles and wearing clothing above her means. She was terminated and not prosecuted, and the CFO was terminated and forfeited his partnership interest.
2. A male CFO was having financial difficulties and thought he was underpaid by the charitable organization, so he devised a scheme to create a fictitious vendor and bank account he controlled. After three months passed, he started personally issuing checks to the vendor and not by having checks prepared by the accounts payable clerk. Finally, the accounts payable clerk brought the periodic check to the Controller’s attention. The QuickBooks Enterprise system identified the missing checks, the investigation began, and the scheme unfolded. The CFO was terminated and ultimately prosecuted by the county.
3. Former fraternity brothers extracted $10,000,000 from a technology company by perpetrating a vendor fraud. The approving official inside the company used the company credit card in violation of company policy to pay for CAD work over four years, and he received a kickback for his efforts. They reached a civil settlement and were later prosecuted federally and received prison time.
4. A male controller over 60 years old in a company colluded with a male Information Technology (IT) person to embezzle $350,000 by using false entries on the company accounting software. Checks were entered into them directly, but the payees were changed on the books. The controller reconciled the bank accounts and buried the payments in the partner draw accounts. He was so dedicated to the company that he never took a vacation or cross-trained anyone for his job. He got gravely ill, and a bookkeeper was brought in to take his place, and she found the embezzlement.  He and the IT person were terminated and not prosecuted, but civil action was taken against the homes they constructed with the stolen funds.
5. A female bookkeeper for a church was going through a divorce and needed money to pay tuition for her children to attend the church school. There was no separation of duties in the accounting office of the church, and she found a means to extract an electronic signature of the pastor and print it on the signature line of checks. She prepared the checks in her name and processed them through the church bank account. The bookkeeper became defensive with the pastor and was terminated. No one caught the forged checks until the parish council started asking questions about the lack of a bank reconciliation for four months. A Certified Fraud Examiner was hired and found the manner and means of the fraud on the bookkeeper’s computer. She was not prosecuted but agreed to repay the $30,000 of embezzled funds.
6. A female CFO with a Wheeler-dealer attitude was living above her means. She felt underpaid by her bosses and embezzled $8,000,000 in a weak internal control environment by creating loans on the company's books. The proceeds of the loans were used to buy a multi-million-dollar home for cash. She spent money on vehicles, motorcycles, gold bullion, and expensive and lavish vacations. The extent of the theft was not discovered until a buyer approached the business, which caused a deeper look into the financial records. Although the company’s outside CPA firm prepared an annual “Review” of the financial records and mentioned the personal loans in their management letter, no one in management or the owners questioned the loan activity. It was determined that the owners and managers were also taking loans from the company but not as much as the CFO. The CFO was terminated and ultimately prosecuted.
7. A church bookkeeper left the church after months of using the former pastor’s credit card for her personal use. When she went on vacation, other employees discovered the theft by the credit card statement. She spent $294,000 on personal expenditures in two years, and the bank account was not reconciled for six months. The case is pending with the Sheriff’s Office.  

The above matters cost the company operating funds and damaged relationships. These delicate matters must be approached properly by an attorney and a financial investigator. If your client wants to be proactive to avoid these and other types of fraud or they suspect an embezzlement is in the process that requires an investigation, a team of forensic accountants, and possibly the testimony of an Expert Witness, please contact Chief Investigator Edmond Martin and the team at Sage Investigations, LLC at 512-659-3179, or email at edmartin@sageinvestigations.com. Let our combined 50 years as an IRS Special Agent and 50 years of financial fraud and forensics investigation benefit you and your clients. Please read about our team CVs.